Does Judicial Efficiency Lower the Cost of Credit?

Abstract

Laeven and Majnoni investigate the effect of judicial efficiency on banks' lending spreads for a large cross section of countries. They measure bank interest rate spreads for 106 countries at an aggregate level, and for 32 countries at the level of individual banks. The authors find that - after controlling for a number of other country characteristics - judicial efficiency, in addition to inflation, is the main driver of interest rate spreads across countries. This suggests that in addition to improving the overall macroeconomic climate in a country, judicial reforms, through a better enforcement of legal contracts, are critical to lowering the cost of financial intermediation for households and firms.

This paper - a product of the Financial Sector Operations and Policy Department - is part of a larger effort in the department to study the determinants of access to finance and the cost of credit.